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Scope and Rates

What supplies are liable to VAT?

Most provisions of goods and services made by a taxable person in the course or furtherance of a business carried on by said person in Iceland are subject to VAT. The tax liability covers all goods and valuables, new and used, all labor and services, regardless of name, except those which are directly exempt from VAT.

Supply does not include anything done otherwise than for a consideration. However, certain actions carried out for no consideration are deemed to be supplies, for example private use of business assets.

Importation of goods and services are normally also liable to VAT.

What is the standard rate of VAT?

The standard rate of VAT is 25.5 percent.

Are there any reduced rates, zero rates, or exemptions?

Yes. There is a reduced rate of 7 percent for certain goods and services, including:

the sale of food and other goods for human consumption. The standard VAT rate applies to sales of alcoholic beverages and raw milk

the rental of hotel and guestrooms and other accommodation (incl. campground facilities). The VAT on rental of hotel and guestrooms and other accommodation will increase from 7 percent to 14 percent, valid from 1 September 2013. However in June 2013 the newly installed Icelandic government placed a bill for the parliament, whereby it is proposed to revoke the upcoming change on VAT rate for hospitality services.

the sale of books, audio books, e-books, magazines and newspapers

the sale of hot water, electricity and fuel oil used for the heating of houses and swimming pools

radio and TV subscription charges

road tolls

CD’s, records, tapes and other comparable mediums with music, not pictures (DVD's excluded).

There is an extensive list of zero-rated supplies, including:

exports

international supplies of services

good transport services between countries

design, planning and other comparable services related to construction and other real property abroad

provisions, fuel, instruments and other equipment delivered for use on board of inter-country vessels, as well as the service provided to such vessels (excluded pleasure boats and private aircraft)

services provided to foreign fishing vessels related to the landing or sale of fish catches in Iceland

the sale and leasing of aircraft and ships (excluded boats less than six meters in length, pleasure boats and private aircraft)

shipbuilding, repair- and maintenance work on ships and aircraft and their fixed equipment (excluded boats less than six meters in length, pleasure boats and private aircraft)

the sale of services to parties neither domiciled nor having a venue of operations in Iceland such as services of consultants, engineers, lawyers, accountants and computer services

the sale and leasing of movable property (oilfield equipment)

services and goods provided in connection with construction, reconstruction, repair and maintenance of movable property (oilfield equipment) and ocean pipelines.

The list of exemptions includes:

health and welfare

education

social services such as day-care centers, nurseries and after-school care

the operation of collection such as libraries, art museums and natural history museums

athletic activity

passenger transportation

postal services

the rental of real property and parking spaces

insurance activity

banking and financing services

lotteries and betting pools

the activities of authors and musical composers in their creation of intellectual property

services of travel agencies

funeral services.

Note: it is not possible to recover VAT incurred in making exempt supplies.

What are the other local indirect taxes beside VAT

There are several other local indirect taxes. Besides VAT, customs and excise duties there is a special oil tax, a fee for the national radio/TV and an “overnight tax” which is a special tax on hotel beds/rooms, camping sites.

Registration

Who is required to register for Icelandic VAT?

Icelandic Entities

VAT registration is obligatory whenever the goods and/or services provided create an income of ISK 1,000,000 or more in any twelve-month period. If a company trades below the registration threshold, it can still choose to register for VAT if the activity turns a net profit.

The business will receive a certificate of registration with the VAT registration number, etc. from the tax authorities. In addition the business will receive a special PIN code by separate letter if the business wishes to deal with their VAT affairs electronically. The VAT registration number and the PIN code are the company's access to declare and pay VAT electronically (only available in Icelandic).

A VAT registration number is normally issued within two to three weeks.

Non-Icelandic Entities

The registration rules that apply to Icelandic entities also apply to foreign taxable persons which are making taxable supplies in Iceland.

If a business is not registered for VAT in Iceland, but sells and delivers goods or services from another state to customers in Iceland, where the value of those sales exceeds a threshold of ISK 1,000,000 in any twelve-month period, it is required to register and account for VAT in Iceland.

If a business supplies electronically supplied services to non-taxable persons (B2C) in Iceland, where the value of those sales exceeds a threshold of ISK 1,000,000 in any twelve-month period, it is required to register and account for VAT in Iceland. Registration is not required when the buyer can account for the VAT on the electronically supplied services as part of the input tax (B2B).

A foreign business without a fixed place of business in Iceland, must register with an Icelandic VAT representative. The foreign business and the VAT representative are jointly and severally liable towards the VAT authorities.

Yes. If the VAT authorities have been, or could have been deprived of tax, an additional levy of up to 10 percent may be imposed. If VAT is not paid within a month from the due date, interests on arrears shall be paid to the treasury. Penalty rates may vary (3 percent in June 2013).

Is voluntary VAT registration possible for an overseas company?

Foreign companies without fixed establishment in Iceland carrying out taxable supplies are required to register for VAT if their taxable transactions exceed the registration threshold of ISK 1,000,000 in any twelve-month period. Activity below the registration threshold can still be voluntarily registered for VAT if it turns a net profit.

Are there any simplifications that could avoid the need for an overseas company to register for VAT?

If a business makes supplies of goods or services in Iceland, then it is required to register and account for Icelandic VAT.

A non-established foreign business which provides taxable services in Iceland or to a customer based in Iceland (from a remote location) can transfer the VAT liability to the Icelandic customer by failing to register for VAT in Iceland. Instead the Icelandic customer will be liable to report the VAT incurred on the purchase (reverse charge). This does not apply, to foreign businesses that supply electronically supplied services to non-taxable persons in Iceland. In such cases, the foreign business must register for VAT in Iceland or appoint a VAT representative.

Does an overseas company need to appoint a fiscal representative?

A foreign company with no fixed place of business in Iceland can either register its taxable activity (via a branch or subsidiary) for VAT purposes or appoint a VAT representative in Iceland. They have joint and several liabilities towards the tax authorities.

Returns

Most registered businesses are required to submit VAT returns on a bi-monthly basis. However if the input VAT regularly exceeds the output VAT, a business may apply to submit monthly VAT returns.

If the turnover subject to VAT of a party obliged to register is less than ISK 3,000,000 a year, the party may apply to submit annual VAT returns.

Are there any other returns that need to be submitted?

No.

If a business receives a purchase invoice in foreign currency, which exchange rate should be used for VAT reporting purposes? (e.g. central bank’s exchange rate applicable on the date of the invoice)

When a taxable person in Iceland receives a purchase invoice in a foreign currency the taxable amount shall be recalculated into Icelandic Krona (ISK). According to the rules, the purchaser shall use the buying rate of the currency on the invoice on the day the invoice is recorded in his accounts. The applicable exchange rate shall be in accordance with the rates presented by the Central Bank of Iceland. The exchange rate which is used shall be stated on the invoice, and the calculated VAT shall then be used for reporting.

VAT recovery

Can a business recover VAT if it is not registered

Yes.

Foreign companies are entitled to a reimbursement of VAT paid in Iceland in connection with the purchase of goods or services. A reimbursement can only cover the VAT of those inputs that parties subject to VAT may count as a part of input tax according to the Icelandic VAT Act.

The application shall refer to purchases of goods and taxable services over a period of at least two months, i.e. January-February, March-April etc., and not exceed one calendar year. The period may be less than two months where it is a question of the remaining part of a calendar year.

The applications shall be submitted at least 15 days after the period in question and not later than 6 years after the transaction.

Minimum VAT amount is ISK 58,700. Where the application covers a calendar year or the remainder of a calendar year the amount shall be at least ISK 11,400.

Does your country apply reciprocity rules for reclaims submitted by non-established businesses?

No.

Are there any items that businesses cannot recover VAT on?

Yes.

Exempt supplies: where VAT relates to both taxable and exempt supplies, businesses need to make an apportionment.

There are certain items on which VAT cannot be deducted nor refunded. For example:

the cafeteria or dining room of the taxable party and all food purchases

the acquisition or operation of living quarters for the owner or staff

perquisites for the owner and staff

the acquisition and operation of vacation homes, summer cottages, children's nurseries and similar objects for the owner and staff

entertainment costs and gifts

acquisition, operation and rental of passenger cars and coaches. The same apply to delivery and transport vehicles with a gross authorized weight of 5000 kg or less, which do not fulfill the requirements for capacity and length of cargo area set by the Minister of Finance in a regulation.

International Supplies of Goods and Services

How are exports of goods and services treated?

Goods

If a company exports goods to a customer (business or private) outside of Iceland, then it does not need to charge VAT, but the export declaration and the invoice must be kept in order to support the zero-rating.

Services

If a company supplies services to parties (business or private) neither domiciled nor having a venue of operations in Iceland, then under certain conditions the supply is zero-rated, provided the service falls within one of the following categories:

the sale or lease of copyright, patent rights, registered trademarks and copyrighted designs and the sale or lease of other comparable rights

advertising services

services of consultants, engineers, lawyers, accountants and other similar specialized services, except for labor or services related to liquid assets or real property in Iceland

please note that Electronically supplied services, is always considered to be used where the buyer is domiciled or has its fixed place of business.

obligations and duties related to business or production activity or the use of rights listed under this point

employment agency services

the rental of liquid assets, except for means of transport

the services of agents acting on behalf of others and for their account as regards the sale and delivery of services listed under this point

telecommunications services.

A taxable service provided in connection with cultural activity, arts, sports, education and other similar activity taking place in this country, and is tax-exempt according the VAT Act, is always deemed as being used here. Sales of services to parties neither domiciled nor having a venue of operations in this country are, in the same manner, exempt from taxable turnover, even if the service is not wholly used abroad, provided the purchaser could, if its operations were subject to registry in this country, consider VAT incurred on the purchase of the services as part of the input tax.

How are goods dealt with on importation?

The customs authorities will calculate and determine the customs duties and import VAT at the time of importation. The declared consignee of the goods is responsible for the payment of customs duties and import VAT.

How are services which are brought in from abroad treated for VAT purposes?

A party purchasing service from abroad for partial or full use in Iceland shall pay VAT on its price (reverse charge). The same applies to the service of a foreign party provided in Iceland, provided the foreign party does not operate a venue for business nor has an agent in Iceland. This is intended to take away any VAT advantage of buying those services from outside Iceland.

The reverse charge applies on a wide range of services. For example:

the purchase and lease of copyright, patent rights, registered trademarks and copyrighted designs and the sale or lease of other comparable rights

advertising services

services of consultants, engineers, lawyers, accountants and other similar specialized services

computer services, other data processing and the transfer of information

employment agency services.

If a business supplies electronically supplied services to non-taxable persons (B2C) in Iceland, where the value of those sales exceeds a threshold of ISK 1,000,000 in any twelve-month period, it is required to register and account for VAT in Iceland. Registration is not required when the buyer can count the VAT on the acquisitions as part of the input tax (B2B).

If a foreign company performs physical services in Iceland, they will have to register and charge VAT.

Invoices

Is a business required to issue tax invoices?

A business shall issue an invoice with every sale or delivery of a good or taxable service. The invoice shall include a date of issue, the name and registration number of the purchaser and seller, the Icelandic VAT number of the seller, type of sale, quantity, unit price and total price. Invoice forms shall be numbered in advance in consecutive numerical order. The invoice shall state clearly whether the VAT is included in its sum total or not. Furthermore, the amount of the VAT shall be stated separately. The invoice shall also state whether it is in fact an invoice or credit note.

What do businesses have to show on a tax invoice?

The enterprise's name, national identification number and VAT registration number shall be printed on invoices. The following must also appear on the invoices:

date of issue

name and national identification number of consignee

description of the transaction

quantity, unit price and total value of goods delivered or services rendered

amount of VAT and tax category. The VAT must be:

stated in Icelandic currency (ISK) or

the currency rate stated on every invoice. The currency rate has to be the official buying rate of ISK against the respective currency. The official buying rate is determined by the Central Bank of Iceland once a day. The date of the invoice has to be the same date the buying rate used.

Note that sale with different VAT rates invoiced on the same document must be specified and summarized separately.

Can businesses issue invoices electronically?

When both parties have a certified electronic bookkeeping software, invoices can be issued electronically. The invoice's authenticity of origin and the integrity of its contents must be ensured. If the seller only uses such software the invoice must be issued on paper.

If the seller has a certified electronic bookkeeping system he must state on the invoice that it originates from a certified bookkeeping system.

The requirements are the same as for paper invoices.

Is it possible to operate self-billing?

The main rule is that the sales documents have to be issued by the seller.

However, self-billing is accepted in some specific situations. Those parties that accept production of others for processing or resale shall issue a return receipt or receipts that may be substituted for regular invoices. This applies, for instance, to purchases of product co-operatives, co-operative societies and others that accept farmers products, marine catches and any kind of industrial product, fully or half-processed.

The same information must appear on that kind of invoices as the regular one.

Can a business issue VAT invoices denominated in a foreign currency?

An Icelandic business can under certain circumstances issue an invoice in a foreign currency. According to the rules, the seller shall use the selling rate of the currency on the invoice on the day the invoice is recorded in his accounts. The applicable exchange rate shall be in accordance with the rates presented by the Central Bank of Iceland. The exchange rate which is used shall be stated on the invoice. The reported VAT shall be recalculated into ISK using the exchange rate.

Head Office and Branch transactions

How are transactions between head office and branch treated?

A head office and a branch are considered to be one entity in relation to Icelandic VAT. Therefore, transactions between a foreign head office and an Icelandic branch are not regarded as sales/supplies. These are regarded as supplies within a business.

Anti-Avoidance

Is there a general anti-avoidance provision under VAT law?

There is a specific anti-avoidance provision that apply between related parties in the Icelandic VAT Act. According to the provision, the tax price in transactions between related parties shall be based upon the general selling price in similar transactions between unrelated parties.

Penalty Regime

What is the penalty and interest regime like?

Any person who does not meet the requirements of the Icelandic VAT legislation through gross negligence or deliberant intent may be subject to a fine or imprisonment for up to two years. Violation of the provisions of the Icelandic VAT legislation being very gross negligence, for example to get unauthorized profit to oneself, can be penalized with imprisonment for up to six years.

As a general rule, fines shall never be lower than double the tax amount and can be up to ten times the tax amount evaded.

For late or underpayment of VAT the surcharge is 1 percent of the amount not paid for every day begun following the due date, although no higher than 10 percent. If VAT is not paid within a month from the due date, interests on arrears shall be paid to the treasury.

Tax authorities

Tax audits

How often do tax audits take place?

Tax audits (VAT) are not performed on a regular basis. The most common form of tax audits derives from the bi-monthly VAT reporting, when the tax authorities inquire about the reported VAT (taxable amount, output and input VAT). Other forms of tax audits derive from suspicious VAT reporting, correction of reported VAT and because of negligence to report VAT.

Are there audits done electronically in your country (e-audit)? If so, what system is in use?

The audits are both formal and electronical. The proceedings are formal and in accordance with the law. Information is delivered either formally or through e-mail and other electronic means. The tax authorities often ask for specific information which is delivered to them in the way which they ask.

Advance rulings and decisions from the tax authority

Is it possible to apply for formal or informal advance rulings from the (indirect) tax authority?

It is possible to apply for a formal advance ruling from the local tax authorities. To apply the requestor must fulfill several conditions regarding the intentions of the taxable person.

It is also possible to apply for an informal ruling regarding the taxable persons past or future intentions. The rulings are not binding for either party involved (requestor or tax authorities) and provide the tax authorities' interpretation of the relevant law/regulation in connection to the specific query.

Are rulings and decisions issued by the tax authorities publicly available in your country?

Formal advance rulings and informal rulings are available in Icelandic on the tax authorites’ web site: www.rsk.is.

Miscellaneous

In your country, are there unique specific indirect tax rules (regimes) that differ from standard indirect tax rules in other jurisdictions?

There are no unique specific indirect tax rules (regimes) that differ from standard indirect tax rules in other jurisdictions.

Are there indirect tax incentives available in your country (e.g. reduced rates, tax holidays)?

There are certain tax incentives available in Iceland regarding the reimbursement of VAT. A non-taxable person can apply for reimbursement of the VAT which he has paid in connection with the work rendered on renovation, building, repair and maintenance of his home.